REFILE-EXCLUSIVE-Iraq plans tough steps against Kurdistan, oil firms

(Refiles with interview day)

By Peg Mackey

BAGHDAD Jan 16 (Reuters) - Iraq plans tough measures
against the country's Kurdistan region and foreign oil companies
working there to stop "illegal" crude exports in an escalation
of its standoff with the autonomous enclave, the oil minister
said in an interview on Wednesday.

Oil exports and contracts are at the heart of a wider
dispute over territory, oilfields and political autonomy between
Baghdad's Arab-led government and Kurdistan, where ethnic Kurds
run their own regional administration.

Abdul Kareem Luaibi said Baghdad intends to sue Genel Energy
- the first company to export oil directly from
Kurdistan - and may slash the government's allocated budget to
the region unless it halts what he rejected as smuggling.

Speaking from his office in the oil ministry in Baghdad,
Luaibi said it was "high time" for the Kurdistan Regional
Government (KRG) to stop "this very dangerous behaviour".

Luaibi also revealed a preliminary agreement with oil major
BP to revive the giant but ageing northern Kirkuk oil
field, which - apart from being at the centre of a feud between
Kurdistan and Iraq - is suffering massive output declines.

Iraq's government insists it alone has the sole authority to
export crude oil and sign deals, but Kurdistan says the
constitution allows it to agree to contracts and ship oil
independently of Baghdad.

Kurdistan has upset Baghdad by signing deals directly with
oil majors such as Exxon Mobil and Chevron,
providing lucrative production-sharing contracts and better
operating conditions than in the south.

Last week, the KRG gave permission to Genel to truck exports
directly from Kurdistan's Taq Taq oilfield to Turkey, bypassing
the federal pipeline system linking Kirkuk with the Turkish
Mediterranean port of Ceyhan. The trade is small, but symbolic.

Baghdad responded swiftly. Iraq's state-run oil marketer
SOMO issued a statement saying it had the right to take legal
action against companies exporting crude independently of the
central government.

"We are going to proceed with judicial proceedings against
this company and all others dealing with smuggled oil," said
Luaibi. "It's our right to stop them."

He said the ministry, via SOMO, has sent a letter to
Anglo-Turkish explorer Genel detailing its position.

Genel declined comment.

DELAYED OIL PAYMENTS

The move to truck oil directly to Turkey came after
Kurdistan exports were halted via the Baghdad-controlled
Iraq-Turkey pipeline due to a dispute over central government
payments to oil companies working in Kurdistan.

Baghdad has made one payment in 2012 to companies, but Iraqi
officials said last month they would not pay oil firms a second
installment because Kurdistan had failed to reach agreed
production under a deal made in September.

Luaibi said that may prompt the central government to cut
back on the 17 percent of the federal budget it allocates to
Kurdistan for its share of national oil production.

"The KRG is trafficking a considerable amount of oil through
Turkey and Iran. This is very dangerous behaviour that violates
the terms of the constitution," said Luaibi.

"We can't carry on paying 17 percent of the budget to the
region with this continued misconduct. The cabinet may decide to
cut the 17 percent (unless the KRG restarts exports through the
federal system)," he said.

EXXON FACE-OFF

Kurdistan's deals with oil majors like Exxon have also
prompted the central government to warn companies they may risk
losing their assets in the south of the country.

Baghdad issued Exxon an us-or-them ultimatum a year ago -
the U.S. major opted to sell its 60 percent stake in the West
Qurna-1 oilfield in southern Iraq and China National Petroleum
Corp (CNPC) has emerged as the front-runner to buy it.

Luaibi said Exxon had yet to inform the ministry of oil as
to whether it had found a buyer.

"The subject is not settled yet," he said. "There will be no
retreat from the ministry of oil. Our position is very clear: We
would be very happy for them to stay at West Qurna, provided
they cancel all their contracts with the KRG."

Despite the tension, output growth at West Qurna-1, where
Royal Dutch Shell is minority partner, continues, he
said.

"The contract is going smoothly - there is good progress,"
said the oil minister, with production running at about 400,000
barrels per day (bpd).

Luaibi said he saw growing instability in the so-called
disputed territories, the ethnically mixed areas where both
Baghdad and Kurdistan claim jurisdiction, and where some of
Exxon's fields are located.

"Exxon is going to face real opposition from the residents
of those regions," he said. "I have personally informed them
accordingly."

Working in Kurdistan would cause "great harm" to Exxon's
reputation, not least because the region is marketing its crude
oil through "smuggling" via Turkey and Iran, he said.

Kurdistan is expected to provide 250,000 bpd to Iraq's 2013
oil export target of 2.9 million bpd. Luaibi said Iraq's exports
and production would fall accordingly without the Kurdish crude.

In 2012, the KRG was to contribute 175,000 bpd to the federal
budget, but handed an average of 61,000 bpd, resulting in a loss
of $4.5 billion, he said.

FAST GROWTH

Iraq, the world's fastest growing oil exporter, still
expects impressive gains this year, he said, with production due
to start up at the southern oilfields of Majnoon, operated by
Shell and Garraf, which is run by Malaysia's Petronas.

After stagnating for decades because of war and sanctions,
Iraq's oil output began to rise sharply in 2010 after Baghdad
secured service contracts with companies such as BP, Eni
, Exxon and Shell.

Production averaged 2.9 million bpd last year, with exports
of 2.4 million - growth of 600,000 bpd since the expansion.

Luaibi and a ministry team have revised plateau production
rates at core southern oilfields in line with a lower overall
target of 9 million bpd, versus an original 12 million.

The target for West Qurna-2, operated by LUKOIL,
has been revised to 1.2 million bpd versus an original 1.8
million bpd, said Luaibi. The amended contract - which has been
extended to 25 years from 20 - will be signed on Thursday.

LUKOIL would like a Chinese company, possibly CNPC, to
succeed Norwegian group Statoil as its partner in West
Qurna-2 and Luaibi said the ministry had no objection.

Revised production targets have also been agreed for Majnoon
and Zubair, run by Eni, and the amended contracts will be signed
in the coming weeks, he said.

The target for Iraq's biggest southern oilfield Rumaila,
where BP is in charge, is now under negotiation.

BP, which enjoys first-mover advantage at Rumaila, will also
have leverage at the Kirkuk oilfield, where output slumped to
280,000 bpd from 900,000 bpd in 2001 after years of injecting
water and dumping unwanted crude and products into the field.

"Yesterday we sent the basic principles of the agreement to
the Council of Ministers for approval," he said. "BP's plan is
to stop the decline in a very short time and then to increase
production."

Iraqi officials have said they would like BP to raise
capacity at this 77-year old workhorse to around 600,000 bpd in
five years.

At the start, BP will make a "special allocation" of $100
million to help stop Kirkuk's decline and carry out surveys to
get a clear picture of the field.

"We have made a proposal for short-term assistance which
they appear to like and we're progressing on from that," said
Michael Townshend, President of BP in Iraq. "It's early days."

The initiative comes as Baghdad aims to strengthen its
position in a dispute with Kurdistan over ownership of northern
Iraqi fields. But Luaibi said politics was not a factor.

Kirkuk is composed of three main geological formations, or
domes: Khurmala (controlled by the KRG), Baba and Avana. BP
would be working at Baba and Avana, said Luaibi.

"It's very important the ministry is not dealing on a
political level," he said. "This is about the technical
well-being of the oilfield."
(Editing by Patrick Markey, Richard Mably)